A collection of often sceptical, always candid observations and insights on the US economy and large-cap equity markets. Readers have observed my style and perspective to be that "the emperor has no clothes," and that is reasonably accurate.
Postings reflect my philosophies and perspectives on economics, business and politics.

Friday, August 31, 2007

Wendys' Fall: Another Case of Schumpterian Dynamics

Wednesday's Wall Street Journal featured a piece on the demise of Wendy's, the fast-food, hamburger chain built by Dave Thomas. It's a classic story of Schumpeterian dynamism, and the ability of otherwise apparently reasonable people to become deluded into thinking that companies last forever.The real story begins with the absence of founder, builder and pitchman, Dave Thomas, in late 2001, when he focused on the final stages of a cancer that would take his life early the next year. According to the Journal article, Thomas was no longer "deeply involved" in the company's operations by late 2001. The fact is, nobody could convey the chain's quirky image and its food's comparative advantages like Thomas did. At this point, sane people would have begun to question if things could ever be the same.Would Apple be Apple without Steve Jobs? It wasn't when he left years ago, replaced by John Scully. Some firms are, like it or not, iconic. Shareholders need to be sanguine about this.After Thomas' death, the remaining management bought a Mexican food chain, Baja Fresh Mexican Grill, for $275MM. But the new unit never performed up to expectations.

Kerrii Anderson, hired as Wendy's CFO in 2000, became interim CEO after the departure of Jack Schuessler in 2006. Her compensation rose from $3.4MM as CFO, to $4.2MM as interim head of Wendy's.

The particulars of how Wendy's performance began to slide are almost immaterial. Take your pick- an accountant running a consumer food business, meddling in the kitchens, manipulating franchisees to push for her as permanent CEO, and her oversight of inept commercials using a male in a wig with red pigtails to replace Dave Thomas as the Wendy's image.

Between disgruntled institutional investors, including Nelson Pelz, and poor sales growth, the company was in trouble. It sold the Baja Fresh unit for only $31MM- a little over 10% of what it paid for the chain four years earlier.

The remaining Thomas family members- his wife and children- were appalled at how the company was faltering. Quotes in the article have them saying,

"You can't tear the company apart to satisfy shareholders," in answer to Pelz' demands to sell Tim Horton's, and that,

"Mr. Thomas's widow and several of his children say they were sick over the news (the sale of Wendy's to another owner) and couldn't understand how management had let the company become so vulnerable (my italics)."

The inept Ms. Anderson 'remained remarkably upbeat' about Wendy's growth prospects. However, as I have written in prior blogs about CEOs such as Jeff Immelt, of GE, when a CEO has earned upwards of $15MM in compensation, they no longer have the same goals as their shareholders. Ms. Anderson had, by this year, been paid at least $20MM (five years as CFO at at least $2.5MM, plus the $3.4MM in 2006, and $4.2MM as CEO). She no longer cares whether the company actually prospers. As my partner, a native of Ohio, noted,

"Do you know how far $4MM goes in Dublin, Ohio? You can't spend that kind of money out there."

The fact is, from a business history perspective, Wendy's had to slow at some point. It was Dave Thomas' passionate creation, and was inevitably destined to either grow too large, or miss some market trend. Companies don't grow forever. Changes in management, especially the loss of a gifted, passionate, insightful CEO, can cause irreparable damage.

If anyone should have had the sense to realize that Wendy's was finished as they once knew it, with Thomas' death, it should have been his family. Odds are, Nelson Pelz is more realistic about Wendy's than the family or its management. He realizes that it now is probably worth more in pieces.

A little perspective, and a lot less emotion, might have saved all the actors in this drama some grief, energy, time and money. Wendy's was destined to falter after the loss of Thomas, without some equally-passionate, experienced leader. Certainly, a relative newcomer, and an accountant, at that, wasn't going to be going toe to toe with McDonalds and winning. Or with Nelson Pelz, for that matter.

Sometimes, it's better to simply acknowledge change and get it over with.

About Me

A well-educated veteran of US corporate strategy positions & hedge fund management, as well as research, product development and project work in consulting, strategy and equity management. Academic background in marketing, strategy, statistics and economics.
Currently own Performance Research Associates, LLC, through which I am involved in proprietary equity and equity options investment management.